How Interest Rates Affect Monthly Mortgage Payments

With recent interest rate hikes from the Bank of Canada, many potential homebuyers are wondering how new, higher rates may affect them. Let us help you navigate the ways that rising interest rates may affect your mortgage, both in the short and long term, by answering some of the most common questions we receive.

How Do Interest Rates Affect Mortgage Rates?

How interest rates affect your mortgage depends on what rate you’re approved for and what kind of mortgage you have.

When you apply for a mortgage, your lender sets your rate based on the Bank of Canada overnight rate, your credit rating, your choice of fixed or variable rate mortgage, and the length of your mortgage term.

From there, changing interest rates affect your mortgage if you have a variable rate mortgage, or if your mortgage is up for renewal and interest rates have changed during your term.

What Are the Differences Between Fixed and Variable Mortgage Rates?

Having a fixed rate mortgage means that the interest rate you’re approved for is applied to your mortgage for your entire term. Your mortgage payments remain the same in terms of how much is paying down your principal loan vs interest.

With variable mortgages, your interest rate varies depending on the current rate set by the Bank of Canada. As interest rates change, the portion of interest you’re paying each month also changes.

How May a Rate Hike Affect Me?

For a variable rate mortgage, a rate hike means that more of your payment is paying down interest. The higher the rate, the more interest you’ll be paying with each mortgage payment. If rates climb high enough, you may reach the “trigger rate”, which is when your mortgage payments are no longer paying down the principal loan.

For a fixed rate mortgage, a rate hike won’t affect you during your term. However, if interest rates have risen when you renew, your mortgage payments may increase.

Pros and Cons of Variable vs Fixed Rates

Depending on the economic outlook and your circumstances, either mortgage type may be right for you.

Pros of a Fixed Rate Mortgage

  • Your monthly payments are predictable. 
  • You won’t be vulnerable to rising rates.

Cons of a Fixed Rate Mortgage

  • You may pay more if interest rates fall.
  • If interest rates fall, you can’t take advantage of lower rates.

Pros of a Variable Rate Mortgage

  • You can benefit from falling interest rates.
  • You may pay less interest over time.

Cons of a Variable Rate Mortgage

  • You’re vulnerable to rate fluctuations and may pay more.
  • It may take longer to pay off your mortgage.

Set Yourself Up for Homebuying Success with JAAG Properties

If you’re struggling to qualify for a mortgage, you aren’t alone. Our Rent to Home Solution allows you to live in your dream home while saving for a down payment and building positive credit. Contact us today to learn more about how we can help you on your path to homeownership!